Respond to the Situation then Calculate for the Following

Book to be used is FINANCIAL THEORY
AND CORPORATE POLICY, FOURTH EDITION, Copeland Weston Shastri

1.
Basic capital budgeting problem with straight
line depreciation. The Roberts company has cash inflows of $140,000 per year on
project A and cash outflows of $100,000 per year. The investment outlay on the
project is $100,000. Its life is 10 years. The tax rate is 40%. The opportunity
cost of capital is 12%.

a.
Present two alternative formulations of the net
cash flows adjusted for the depreciation tax shelter.

b.
Calculate the net present value for project A,
using straight line depreciation for tax purposes.

2.
Basic replacement problem. The Virginia company
is considering replacing a riveting machine with a new design that will
increases earnings before depreciation from $20,000 per year to $51,000 per
year. The new machine will cost $100,000 and has an estimated life of eight
years, with no salvage value. The applicable corporate tax rate is 40% and the
firms cost of capital is 12%. The old machine has been fully depreciated and
has no salvage value. Should it be replaced with a new machine?

3.
Calculate the internal rate of return for the
following set of cash flows:

t1: 400

t2: 400

t3: -1,000

If the opportunity cost of capital is 10%, should the project be
accepted?

4.
The Ambergast Corporation is considering a
project that has a three-year life and costs $1,200. It would save $360 per
year in operating costs and increase revenue by $200 per year. It would be
financed with a three-year loan with the following payment schedule (the annual
rate of interest is 5%):

Payment Interest Repayment of
Principal Balance

440.65 60.00 380.65 819.35

440.65 40.97 399.68 419.67

440.65 20.98419.67 0

121.95 1,200.00

If
the company has a 10% after tax weighted average cost of capital, has a 40% tax
rate, and uses straight-line depreciation, what is the net present value of the
project?